Medco to Pay $29.3 Million to Settle Complaints of Drug Switching

By MILT FREUDENHEIM

Published: April 27, 2004

Medco Health Solutions, the largest pharmacy benefits management company in the nation, said yesterday that it had agreed to start telling patients, doctors and employers about billions of dollars in annual rebates that it has received from drug manufacturers for promoting their products.

The agreement settled state and federal complaints that accused Medco of violating consumer protection and mail fraud laws by switching patients to drugs that were said to add to costs for patients and their health plans.

State and federal officials said the terms of the settlement would establish new rules for a largely unregulated industry, providing more transparency and prohibiting actions that critics contend favor drug manufacturers at the expense of patients. The attorney general of Maine, Steven Rowe, said the agreement would ''lift the cloak of secrecy around Medco.''

''We will no longer have to guess,'' Mr. Rowe said, ''about who will benefit from this P.B.M.'s drug switching and what the value of that benefit is.''

Medco, based in Franklin Lakes, N.J., agreed to change some practices and pay $29.3 million to resolve the legal issues. The company did not admit any wrongdoing.

The settlement was announced by Medco, Justice Department officials and the attorneys general of 20 states. State and federal officials said it would be a precedent for other large pharmacy benefit managers, or P.B.M.'s, many of which are also the subjects of state investigations. That is especially important, they said, because benefit managers will have an significant role in the new Medicare drug benefit that will be offered to millions of elderly and disabled people in 2006.

A Medco spokeswoman supported that view. ''We agree with the attorneys general that the agreed business practices are the new gold standard for P.B.M.'s,'' said the spokeswoman, Ann Smith. ''Many of these practices have already been adopted.''

The law officials declined to comment on the status of other cases involving the pharmacy benefit industry. Phil Blando, a spokesman in Washington for the industry's trade group, the Pharmacy Care Management Association, said that the group had a policy of not commenting on developments involving its members.

Patrick Meehan, the United States attorney in Philadelphia, where the federal suit was filed, said the settlement prohibited Medco from seeking to switch drugs when the net cost of doing so would be higher than the cost of the prescribed drug. Medco had been accused of switching patients being treated for cholesterol problems from Lipitor, made by Pfizer, to Zocor, a similar drug made by Merck, that often cost more.

In a lawsuit last September, the Justice Department accused Medco of receiving $430 million from Merck, its former parent, to switch patients to more expensive drugs like Merck's Zocor, in 201. Merck spun off Medco in August.

Under the settlement, Medco will pay a maximum of $2.5 million to make up for costs of additional doctor visits and other tests required after their doctor prescribed a new drug.

It also prohibits switching to more expensive alternatives when a drug like the antidepressant Prozac loses patent protection and is undercut by lower-cost generic versions, Mr. Meehan said. His assistant, James Sheehan, has been investigating arrangements between drug manufacturers and pharmacy benefit managers for four years.

Last September, Mr. Meehan's office filed a whistle-blower suit complaining that the company's actions had harmed federal employees' health plans served by Medco's mail-order pharmacies. Medco does not admit to involvement in the actions of former employees in Tampa, Fla., cited in the suit, who may have ''done the wrong thing,'' Medco's chief executive, David B. Snow Jr., said. Money penalties have not been agreed to in the whistle-blower suit.

As part of the settlement, Medco also agreed to provide benefits valued at about $1 million to each of the 20 states in cash or medicine for state health-care clinics or cards that low-income and elderly residents could use to fill free generic prescriptions. The settlement also provides $6.6 million for the states' legal costs.

The states included Arizona, California, Connecticut, Delaware, Florida, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Nevada, New York, North Carolina, Oregon, Pennsylvania, Texas, Vermont, Virginia and Washington. For all the greater transparency promised by the agreement, however, the officials were unable to put a dollar estimate on the cost of the drug switches. Because actual prices in P.B.M. contracts are not disclosed, there was ''no way to know exactly,'' said Thomas F. Reilly, the Massachusetts attorney general.

Mr. Reilly said that Medco would also pay $5.5 million ''to compensate Massachusetts for losses suffered by our program in 1997 to 2000,'' in a separate deal.

Medco said the agreement would take effect in the next 120 days. It said $21.1 million of its costs, or 5 cents per diluted share, would be recorded as an expense in the first quarter of 2004 but would not affect its projected earnings for the year. Medco plans to announce its first quarter results today.

Anticipating one provision of the settlement, Medco said in a filing with the Securities and Exchange Commission that rebates it received from pharmaceutical manufacturers totaled $2.97 billion in 2003, compared with $2.465 billion in 2002 and $2.535 billion in 2001. Most of the rebate money was for drugs it placed on preferred lists called formularies, Medco said.

The settlement ''is consistent with our goal to position Medco as the most transparent company in our industry,'' Mr. Snow, Medco's chief, said.

Under transparency provisions of the new Medicare law, pharmacy benefit managers and other sponsors of Medicare drug discount cards must pass along the full amount of any manufacturers' rebates to consumers. The P.B.M.'s will have to disclose rebate terms to Medicare officials (but not to the public), when the new Medicare payments for drugs begin in 2006.

Medco shares gained 22 cents and closed at $35.25 yesterday.

''There were no findings that substantiate any of the allegations made in the complaints,'' Ms. Smith of Medco said. Mr. Sheehan of the Justice Department said, ''They do not admit violations, but they did change their practices.''